RBI Releases Financial Stability Report With Mention of DeFi, US Efforts to Regulate Crypto Sector

The Reserve Bank of India (RBI) has published its latest Financial Stability Report (FSR) that outlines important events that have recently taken place in the national and international banking and fintech sector. The domain of decentralised finance (DeFi) earned a brief mention in RBI’s report wherein the central bank, discussed the focus of global bodies on developments in the sector. The RBI has also touched upon efforts by the US to regulate the crypto sector.

RBI’s FSR report mentions DeFi technology

In its FSR report, the RBI acknowledged that digital financial systems have seen adoption around the world, leading to the creation of newer business models and financial distribution channels.

The advanced technologies of distributed ledger (blockchain), cloud computing, artificial intelligence (AI), and machine learning (ML), as per the RBI, have shown to have pertinent implications for financial systems around the world.

Talking in particular about DeFi, the report said that global regulatory bodies like the Financial Action Task Force and the International Organisation of Securities Commissions (IOSCO) are constantly examining developments around DeFi. These global financial whistleblowers are concerned that a rapid growth in DeFi could have effects on the broader asset market and subsequently on the global financial stability.

US efforts to regulate the crypto sector

The central bank notes that the US government is attempting to create a regulatory framework for digital assets, in the form of the Financial Innovation and Technology for the 21st Century Act (FIT21) legislation. The FIT21 Act is expected to and empower the US Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) to oversee digital assets, venues and entities. As per the RBI, the FIT21 Act is also expected to ensure market certainty, while granting some form of recognition to digital assets in the country.

The RBI report also touches upon the US SEC’s decision to approve the trading of exchange traded products (ETPs) for select cryptocurrencies like Bitcoin and Ether ETFs.

On the other hand, India’s central bank has expressed concerns around the rising number of cybercrimes connected with the crypto sector on an international level.

“Ransomware crypto payments, business email compromises and cost of data breaches surged to a new high during 2023. The financial sector has reported over 20,000 cyber intrusions and digital attacks, which resulted in losses amounting to US$ 20 billion over the last 20 years. Furthermore, cyberattacks are found to swell during periods of political and economic uncertainty such as geopolitical tensions, with disruptive consequences,” the report noted.

RBI’s stance on crypto in India appears to be unchanged

The RBI has repeatedly said it prefers that crypto be banned in the country. Since cryptocurrencies allow anonymity in transactions, the central bank is concerned that crypto assets could be exploited for illicit activities like terror financing and money laundering. The crypto sector also gives people more control over their funds and eliminates the need for intermediaries like banks to process financial transactions, which threatens the monopoly of central banks on their respective financial systems.

Even so, the DeFi sector was mentioned once in RBI’s report, and industry members in the country are already hopeful about the future of the fintech sector in India.

“The RBI released its half-yearly Financial Stability Report (FSR) today. There is very little in there for the crypto asset sector, which could be both good, or bad, depending on which way one looks at it! There is no specific negative commentary on financial stability risks from digital assets, which could again mean something, or nothing, depending on which way one looks at this,” said R Venkatesh, Head of Public Policy, CoinSwitch as commenting on the development.

The latest report appears to reaffirm the RBI’s unwillingness to accept cryptocurrencies as legitimate modes of payments in the country in the near future.